In the world of futures trading, you will often hear about the concept of “trading with an edge.” This concept is equally important in the stock market as well, but most market pundits will simply tell the uninformed investor that the market goes up in the long run, so the edge is to simply stay in the market and dollar cost average your purchases. Since 2000, we’ve seen how that strategy has been very difficult to follow in an environment where people lose their jobs and need to dip into their investment savings at a time when they should be buying more stock.
In any event, what exactly is “an edge?” Curtis Faith, in his book “Way of the Turtle,” defines a trading edge as “an exploitable statistical advantage based upon market behavior that is likely to occur again in the future.” He goes on to say…”An edge is identified by locating entry points where there is a greater than normal probability that the market will move in a particular direction within the desired time frame. These entry points are then paired with exit points that are designed to profit from the move in which the entry point is designed.”
This is essentially the same concept that casinos have employed when developing games of chance. In the long run, these games provide an edge to the casino over the client, which allows the casino to be profitable. The casino is not overly concerned when losses occur, because when a client wins, they are encouraged to keep playing, and that allows the casino to assert its long term edge. Losses are simply viewed as the cost of doing business.
Traders need to learn to identify an edge for themselves and not focus on short term trading results. Unfortunately, most new traders enter the markets with the wrong attitude and goals. They see the potential for massive profits in the short run. They try out some hot new trading system that they read about in a magazine or on the internet, and think this is how traders win in the markets.
In actuality, this type of trader is similar to the client at a casino. It is actually the long term player who has developed a statistical edge for themselves that will win in the long run, but not necessarily in the short run.
If you want to be successful in trading, the first thing you should do is read about traders who have actually been successful over a long period of time, and learn how they’ve done it. You won’t learn specific details about their trading strategy, but you don’t need to. In fact, you should ultimately develop your own, because you will have more confidence in your strategy if you develop it yourself. Once you have developed your own strategy, trade the markets like it is a business. Losses are simply an expense, and profits are revenues. In the end, if your revenues are greater than your expenses, you win.
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